Lesson 1 of 2 · 6 min
Interest on interest
Growth on your growth. Invisible for years, then most of the total. Why the number of years does more of the work here than the monthly amount does.
Put ₹100 somewhere that pays 10% a year. After one year you have ₹110. The next year's 10% is worked out on that ₹110, not on the ₹100 you started with, so you earn ₹11 instead of ₹10.
That extra rupee is interest paid on interest already earned, and it is the entire idea. Simple interest never does it — it pays you only on what you originally put in, so every year hands over exactly the same amount.
For the first few years the difference is almost nothing, which is why people give up. It becomes enormous later, which is why the people who did not give up look lucky.
Your turn
₹1,00,000 at 10% a year, compounded annually. What is it worth after 2 years, in rupees?
Match them up
Four terms this lesson turns on
Pick a term, then pick what it actually means.
Pick a term on the left.
Check yourself
1 / 3
Kabir asks
₹1,00,000 at 10% for two years gives ₹1,20,000 under simple interest and ₹1,21,000 under compounding. Where does the extra ₹1,000 come from?
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